I received a letter from a reader recently concerning fund charges and, with much publicity on the subject at the moment, it seems an opportune time to air my own views.
Fees and charges are important. Over time, they can make a huge difference to investment returns.
A debate currently rages on whether the annual fees deducted from unit trust or Oeic funds are being properly reported.
The figure we most often see is the annual management charge. This is the charge the fund company takes for running the fund. Yet it excludes various items such as legal costs. So the alternative, more comprehensive figure is the total expense ratio or TER, soon to be known as the ongoing charge. This includes the various other costs incurred by the fund so it is a better measure than the annual management charge.
Dealing costs, however, are still excluded. Some argue they should not be but they can change drastically over time, so perhaps it would make the figure more volatile.
However, a more important point in my view is how fund administration and registration costs are being taken. Increasingly, they are being expressed as a fixed percentage of the fund. It may sound a small point but percentages of growing funds add up to a lot of money quickly. These charges ought to be relatively static and should not really increase markedly as the fund grows. These percentages should be falling over time on funds that are growing assets.
Some fund companies are also seemingly reducing the AMC while maintaining the TER level, something that also does not look right to me. It implies that companies are picking and choosing what goes into the AMC and what doesn’t, so is it really worth looking at the AMC figure at all?
Some groups have suggested there should be a standard figure for the total cost of fund ownership. It sounds an eminently sensible idea, and, speaking from a consumer point of view, I ask why the FSA has not sorted this out already. It seems the current system is flawed and an opportunity has been missed with the recent introduction of the new key investor information document.
It is their job as financial services regulator to look at fund costs and how fund groups are charging. It seems reasonable that a system should be put in place where consumers can compare the price of a fund with one annual percentage figure that accurately reflects total cost. At present, fund companies appear to have too much discretion, which makes the job of analysing charges incredibly tricky for advisers and clients alike.
Mark Dampier is head research at Hargreaves Lansdown